Fed watchers to focus on Jerome Powell's patience, 'thoughts' on tapering tomorrow

Apr. 27, 2021 1:26 PM ETBy: Liz Kiesche, SA News Editor6 Comments
  • The Federal Reserve's monetary policy-setting committee is expected to show exactly how patient it is when the Federal Open Market Committee issues its statement tomorrow.
  • The central bank isn't expected to adjust monetary policy at its April meeting, rather investors will be looking for whether the officials start "thinking about thinking about" tapering the pace of $120B+ monthly asset purchases. Most economists aren't expecting that to start until the June meeting at the earliest, according to CNBC.
  • "We're not expecting the Fed to give any indication until summer as to what it might do with respect to its balance sheet," Tony Crescenzi, Pimco market strategist and portfolio manager, told CNBC. "It may start dropping hints around that time."
  • Economists surveyed by Bloomberg News expect the Fed to announce it will start paring back on its monthly asset purchases before the end of the year. Some 45% of those surveyed expect such an announcement in Q4 2021 in addition to 14% who expect that to happen in Q3. That's a shift from March when slightly more expected tapering to start in 2022.
  • Even talking about easing up on the Fed's purchases of Treasurys and mortgage-backed securities will be a delicate balance. In 2013, Fed officials triggered a "taper tantrum" in the bond market — which pushed yields on the 10-year Treasury up by half a percentage point in a month — when they started to indicate a reduction in asset purchases was on the horizon.
  • That's something the current Fed officials will be careful to avoid, as the higher interest rates would threaten the economic recovery.
  • In its last statement, the Fed said it would continue its pace of buying at least $80B per month of Treasury securities and at least $40B per month of MBS "until substantial further progress has been made toward the Committee’s maximum employment and price stability goals."
  • So any indication that progress has been made towards those goals may be significant and could indicate that officials would consider moving up plans to adjust policy.
  • Investors and economists will also be listening for how Fed Chair Jerome Powell characterizes inflation, which can be a sign that the economy is running too hot. He has been maintaining that any spike in price increases will be "transitory."
  • The Fed "will be looking deeper into the inflation story than the headline numbers," writes Tim Duy, chief economist at SGH Macro Advisors.
  • He sees the most significant inflation pressure in the headline numbers, but if core inflation stays on the high side of the Fed's target as the prices paid measure rolls over, then "we should be watching for signs that inflation expectations are moving higher.
  • "The Fed would tend to pull forward the process of reducing policy accommodation under those circumstances," Duy said.
  • Powell is also likely to acknowledge that the economy is making progress given the far better than expected employment report in March, when the economy added 916 jobs vs. the ~650K expected. Furthermore, jobless claims last week hit a 13-month low.
  • And while COVID vaccinations continue apace, Powell is likely to point out that the virus and its variants still pose a risk to the economic outlook. In March, he said the public health crisis still poses "considerable risks to the economic outlook."
  • In the FOMC's "Summary of Economic Projections" released after the March 2021 meeting, most Fed officials didn't expect a rate increase through 2023. We won't get an update on that timing until the June FOMC meeting, though, when the next SEP comes out.
  • A day ahead of the central bank meeting, yield on the 10-year Treasury rises 1 basis point to 1.59% in mid-afternoon trading. On the day of the last Fed meeting, the yield was at ~1.65%.

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